Chidambaram at the opening ceremony of the Jeddah meet. (Reuters)

Jeddah, June 22: The governments in India and the US can agree on the nuclear deal but not on oil.

India today arrayed alongside countries that challenge America’s diagnosis of why oil prices are shooting up, widening a chasm that reduces the possibility of hard measures to check the spurt.

At a conference of fuel producing and consuming countries in Saudi Arabia’s Jeddah in the middle of the world’s third “oil shock”, the kingdom offered to pump more crude but warned that a supply increase alone would not be enough to calm the markets.

Saudi King Abdullah promised $500 million in soft loans and called for a $1billion Opec fund to help the world’s poor cope with soaring prices. US crude closed near $135 a barrel on Friday.

But the bone of contention — why oil prices have doubled within a span of 12 months — remained unresolved, without which effective remedial action cannot be taken.

Finance minister P. Chidambaram rejected the widespread view in the West that demand (by India and China) was causing the phenomenal rise in oil prices. “We respectfully reject the suggestion that rising demand is the cause of spiralling oil prices,” Chidambaram told the energy meeting in this Red Sea coastal city.

“The causes for the current pandemonium in oil prices lie elsewhere — in unregulated over-the-counter markets and futures trading in oil,” Chidambaram added.

In stark contrast, US energy secretary Samuel Bodman insisted that huge demand was driving up the oil prices. He refused to blame speculators for the market volatility. Bodman said world oil consumption growth has averaged about 1.8 per cent a year since 2003 with the largest share of that growth coming from countries like China and India.

But for the past three years, global oil production has remained constant at roughly 85 million barrels a day, and Opec production has remained largely flat, he said in a written statement.

Chidambaram said there was ample evidence that large financial institutions, pension funds and hedge funds had channelled billions of dollars into commodity investments.

Investment funds, mostly based in the US, are suspected to have pumped money into oil and other commodities as they flee poorly performing asset classes. Under pressure, US regulators last week stepped up monitoring the complex futures markets.

Petroleum secretary M.S. Srinivasan told PTI from Jeddah that speculation alone had driven up oil prices by $60 a barrel. The official did not say how he arrived at the figure but he termed it the “speculative premium”. He felt oil prices would fall “drastically” if crude was taken off futures trading.

Chidambaram proposed a “price-band mechanism”. “Consuming countries must guarantee that oil prices will not fall below an agreed level, and producing countries must guarantee oil prices will not rise above a guaranteed level,” he said. However, given the sharp rise in prices, it is not clear how a band acceptable to both sides could be arrived at.

Saudi Arabia, the world’s biggest oil exporter, has already vowed to raise production to 9.7 million barrels per day in July, its highest rate in decades. The kingdom’s oil minister, Ali al-Naimi, promised today to supply still more should customers want it.

But Iranian oil minister Gholamhossein Nozari said: “More production will go into storage, there is no more demand.”

Royal Dutch Shell CEO Jeroen van der Veer had sobering words to offer: “What I’ve heard so far are basically all good ideas, but it will probably not change the price tomorrow morning.”